Which of the following is true about the book value and market value of a firm's debt?
A)The book value of a firm's debt generally is higher than the market value of the firm's debt.
B)The book value of a firm's debt generally is either equal to or very close to the market value of the firm's debt.
C)The book value of a firm's debt generally is either equal to or very close to the market value of firm's assets.
D)The market value of a firm's debt generally is higher than the book value of firm's assets.
E)The market value of a firm's debt must equal the market value of a firm's assets.

Question

Quizplus · Accepted Answer

The book value of a firm's debt is based on the original cost of the debt and may not reflect current market conditions, while the market value of a firm's debt is based on current market conditions and may fluctuate. Therefore, the book value of a firm's debt may be higher or lower than the market value, but it is generally close to the market value. Choice A is incorrect because the market value of a firm's debt is generally higher than the book value due to changes in interest rates and credit risk. Choice C and D are incorrect because they do not relate to the book value and market value of a firm's debt. Choice E is incorrect because the market value of the firm's assets is not directly related to the market value of the firm's debt.

Which of the Following Is True About the Book Value